Rise of the Zombies – Precious Metals Supply and Demand

Last week, the prices of gold and silver fell $35 and ¢70, respectively. But what does that mean (other than woe unto anyone who owned silver futures with leverage)?

The S&P 500 index and the euro was up a bit, though the yuan was flat and copper was down. Most notably, the spread between Treasury and junk yields fell. If the central banks can lower the risk of default premium, they can make everything unicorns and rainbows again extend the aging boom a while longer.


Non-Zombie vs. Zombie enterprises, via BIS and OECD. The Zombies won’t be able to withstand rising interest rates, which will unmask the misallocation of capital in the economy fostered by the extremely loose central bank policies of recent years. [PT]


The Bank for International Settlements defines a zombie corporation as one that’s been around for at least 10 years, and which has an interest coverage ratio less than one for three years in a row. In other words, mature firms with profits < interest expense.

As of 2016, zombies were over 12% of all public non-financial firms.

The central planners think to get GDP to go up. Well, zombie firms certainly consume, so keeping them alive would seem to support this goal. Plus they employ people. Wall Street certainly does not object. Partisans of whichever party has sent its leader to the White House also want rising GDP.

So the Fed finds ways to keep zombies alive. Since zombies exist only by the grace of ever-lower interest rates, and ever-more-promiscuous credit conditions, the central bank must find a way to lower rates and push investors out on the risk curve.


The survival probabilities for Zombie firms have increased as a result of central bank intervention. These companies are like a millstone around the global economy’s neck, as they continue to be able to compete for scarce resources with a dwindling number of genuine wealth creators. [PT]

They succeeded this week. Short-term interest rates were down. Rates on junk bonds fell also. But Treasury yields and AAA corporate bond yields were up. Oh well, you can’t have it all.

Actually, the absolute level is not the only thing that matters. The spread between junk and AAA or Treasuries also matters. This is a measure of stress at the margin, and also the penalty that junk firms must pay compared to competing firms.

One of the perennial criticisms of the Austrian School is that we don’t offer a precise prediction of timing (and a number of folks have tried to predict timing and have been wrong). We think this criticism misses the point.

If a process is destructive of firms, there is value in identifying it clearly, of shining a spotlight on it, of bellowing from the rooftops. Sure, it would be good to be able to say, “June 4 at 11:22AM is when it will begin.” But absent that kind of precise timing, we can still be sure that a destructive process is ongoing. And the response, “but rising GDP,” is no response to this allegation.

We also think that the Fed is in a pickle. To keep the zombies adequately fed — with the blood of the savers, it can never be said too often — it has to lower rates. However, what conventional theory can justify this?

We have heard some noise, faint so far, that there’s no inflation so therefore they have more latitude, etc. And we are not even talking about the so-called modern monetary theory now being pushed from the Left.

Of course there are scant signs of rising prices (other than where tax and regulation force up retail prices). Lower rates mean hamburger chains can borrow more to open up more hamburger restaurants. Manufacturers of kitchen equipment can borrow more to expand production of hamburger grills. The result is a greater supply of burgers, soft prices, and falling profit margins. Not inflation.

We saw a discussion among Austrian economists recently about whether or not one should own gold. Yes, gold is not an investment. So, why own it? If the Fed has driven the risk yield of all investments down, where is your line? Where do you choose not to be invested?

We have said many times that the Fed cares not about the price of gold. Its officials would have no reason to incur career risk (or prison time) to manipulate the price, even if they had the means. But here is one area where they care about not the price of gold per se, but the attractiveness of investment.

If investors expect flat to negative returns, then they must turn to gold as the only alternative. If you cannot get a return on capital, then you at least want return of capital. This is not what the Fed wants, what Wall Street wants, what Warren Buffet wants, or what most investors want. It’s a scenario where few firms make money, many lose money, and increasing numbers at the margin go under. And few investors stay even.

It will be a scenario like 2008, when it comes. We have a tool to help predict it: the gold basis. Is it a good thing, or a bad thing, that our indicator is not flashing a red alert at the moment?


Fundamental Developments

Let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.


Gold and silver, priced in USD


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It was up a point and a half this week.


Gold-silver ratio


Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of the gold price.


Gold basis, co-basis and the USD priced in milligrams of gold


Well, we broke a month long streak of rising gold prices. This week (actually starting midweek last week), the price of gold began falling.

Along with this, we see a big rise in the scarcity of the metal (i.e., the co-basis), at least in the April contract. The continuous gold basis is up only slightly). This shows a selloff of both metal and futures.

The Monetary Metals Gold Fundamental Price is up marginally, to $1,421.

Now let’s look at silver.


Silver basis, co-basis and the USD priced in grams of silver


The price of silver dropped by a much greater percentage (we can see the dollar rose from 1.93g silver to 2.01 grams). And we see a big rise in the co-basis along with the price move. But as with gold, the continuous silver basis shows no real move.

Still, the Monetary Metals Silver Fundamental Price is down ¢29 to $16.16.


Charts by: BIS, Monetary Metals


Chart and image captions by PT


Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.




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One Response to “Rise of the Zombies – Precious Metals Supply and Demand”

  • utopiacowboy:

    MMT? Lol, the US government is already running a trillion dollar annual deficit. I guess they figure if it worked for the Japanese it can work for us! Whee, this economic stuff is easy!

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